Three prominent forecasters – Oxford Economics consultancy, Investec and Deutsche Bank – have issued a revised outlook, indicating that the Bank of England (BoE) might need to expedite its plans for the first interest rate cut.
This comes in light of their predictions that the inflation rate will plummet to two per cent by April, a significant drop from the current 3.9 per cent recorded in November of the previous year.
The reassessment primarily attributes this anticipated decline to a sharp fall in energy prices and the cost of oil on the international wholesale markets.
The Consumer Prices Index (CPI), a key metric monitored by central banks, is expected to fall below the two per cent threshold within the next four months, according to the revised forecasts.
Additionally, the independent forecasters assert that their findings will likely prompt a re-evaluation by the Bank of England officials in their upcoming review scheduled for the following month. This re-evaluation is expected to lead to a downward adjustment in the predicted inflation trajectory for the current year.
One of the primary factors influencing this downward revision is the significant decline in energy prices and the cost of oil on international wholesale markets. The forecasters argue that this will contribute to a more rapid reduction in inflation than initially anticipated by the Bank of England during its November review. The repercussions of such a decrease in inflation are extensive, affecting various sectors of the economy.
The Bank of England's interest rate setting committee, in a series of speeches before Christmas, had previously communicated that lending rates would remain high throughout 2024. This strategic move was intended to mitigate the risk of a resurgence of rapid price increases, ensuring stability in the economic landscape.
Governor Andrew Bailey had underscored the challenging task ahead in returning inflation to the two per cent target, pushing back against speculations that official borrowing costs would soon be reduced from the existing 5.25 per cent.
Contrary to the Bank's initial stance, financial markets have adjusted their expectations, bringing forward the timeline for the first likely interest rate cut to April.
Furthermore, they have increased the likelihood of witnessing five more cuts by the end of the year, potentially bringing interest rates below four per cent for the first time since January 2023. This shift in market sentiment indicates a growing consensus that inflation might recede more rapidly than previously anticipated.
During a recent hearing of the Treasury committee, Governor Andrew Bailey refrained from providing specific comments on the outlook for monetary policy.
However, he acknowledged the recent decrease in mortgage costs, expressing hope that this trend would persist. The fall in market interest rates over the last few months has contributed to a reduction in the cost of mortgages, a development that Bailey seems optimistic about.
The optimism about falling inflation has led to a tangible impact on mortgage rates, particularly for those fixed over five years.
Responding to this positive sentiment, investors have largely disregarded warnings about potential factors, such as the Suez Canal blockage and increased shipping costs due to the Middle East conflict, that could drive inflation higher. The lowered energy and fuel prices on international markets have also played a role in reducing heating and transportation costs.
Economists at Oxford Economics, Investec and Deutsche Bank have provided their insights into the inflation trajectory for the upcoming year.
Andrew Goodwin, chief UK economist at Oxford Economics, anticipates the CPI to average 2.1 per cent in 2024, a significant downward revision from the November forecast of 3.1 per cent. Goodwin confidently states that inflation is on track to return to the two per cent target by April.
Phil Shaw, senior UK economist at Investec, suggests that the impact of tax cuts announced in the autumn statement will be less than initially expected. He predicts that inflation will fall to 1.5 per cent in the third quarter of the year, with the first-rate cut likely to be implemented in June. These projections hint at a more optimistic economic scenario than previously envisioned.
Deutsche Bank economists predict a potential drop in UK inflation to "a little below two per cent in April and May", followed by a stabilising range of two per cent to 2.5 per cent for the remainder of the year.
Sanjay Raja, the chief UK economist at Deutsche Bank, acknowledges certain risks to this forecast, including the possibility of strong wage increases pressuring firms to raise prices and additional tax cuts boosting consumer spending.
